High $A hard to budge

Former Perpetual and 452 Capital fund manager Peter Morgan says, “The Reserve Bank is having to act because of the mistakes of the government.” Photo: Luis Enrique Ascui

Vesna Poljak

There’s not much the Reserve Bank of Australia can do to weaken the dollar, cutting interest rates to a record low could store up trouble down the track and the federal budget has got out of control, say Australia’s top money managers and strategists.

Former Perpetual and 452 Capital fund manager Peter Morgan puts it most starkly. “First, you’ve got a federal government that in economic terms is mismanaging the economy and causing all sorts of problems with regards to confidence,” he says. “The Reserve Bank is having to act because of the mistakes of the government.’’

The money experts more or less agree that the dollar is caught up in the global currency wars and there is not much the Reserve Bank can do about it.

“Right now I doubt that even a 100 basis point cut in the RBA’s policy rate would move the $A substantially lower over the medium term,’’ says UBS interest rate strategist Matthew Johnson in a roundtable organised by The Australian Financial Review.

National Australia Bank’s global head of research Peter Jolly agrees that the dollar is being buoyed by monetary “quantitative easing” in Japan, the US, Europe and the UK. But, as long as the dollar is allowed to float, he says the Reserve Bank’s ability to control it is “minimal”.

Mr Jolly warns that a continued high dollar may force the Reserve Bank to choose between rising unemployment and asset price inflation that could have risks for the financial system.

Investor ‘mania’ for yield

While others doubt that an asset price bubble is an immediate concern, Mr Morgan suggests that global quantitative easing and ultra-low interest rates are driving an investor “mania” for yield that is pushing up share market and other asset prices higher than justified by the fundamentals.

“At the end of the day a dividend can only be paid out of sustainable earnings,” he says.

As for the prospect of extended budget deficits, Mr Johnson suggests that fiscal policy has been too loose for a decade. Blackrock head of fixed interest Steve Miller agrees. “I think that it is a little concerning that after 22 years without a recession we look like running a budget deficit close to 2 per cent of GDP,’’ he says. “I find, too, that the political debate around fiscal policy is now dominated by an entitlement agenda.’’

Jolly warns that Canberra should heed the “soft shots” from the global credit rating agencies.